The average American is much better off now than four decades ago

Estimates of income growth vary greatly depending on methodology

From The Economist. Excerpt:

"The gap between the two is accounted for by three methodological differences (see chart). First, the CBO takes demography into account. This seems sensible: more Americans are living alone and American women are having fewer children, so households have fewer mouths to feed.

The second is that the CBO uses the personal-consumption expenditures (PCE) index to measure inflation, whereas the Census Bureau uses the consumer-price index (CPI). These differ in two main ways. The CPI includes only what consumers spend on themselves, whereas the PCE index also includes expenditures on their behalf, such as employee health insurance. And the CPI’s basket of goods is updated every two years, whereas that for the PCE index is updated quarterly. This means it is quicker to pick up substitutions: as the price of one item (apples, say) rises, consumers seek cheaper alternatives (for example, pears).

In 2000 the Federal Reserve’s rate-setting body switched from the CPI to the PCE index for its inflation target, citing this reason. Growth in the PCE index has generally been half a percentage point below the CPI. The gap, small in the short run, grows wider with each passing year.

The third difference is that the Census Bureau uses pre-tax incomes, whereas the CBO takes taxes and transfers, such as government-funded health insurance, into account. Between 1979 and 2014 the average federal tax rate for families in the middle fifth of the pre-tax income distribution fell from 19% to 14%. Transfers rose from 0.8% of pre-tax income to 4.7%.

Other data also suggest that the CBO’s methods paint a fairer picture. Bruce Sacerdote of Dartmouth College has calculated that household expenditure, converted to 2015 dollars using the CPI, has risen by 32% since 1972. Spending on food and clothing has fallen from 27% of the total to 16% in 2016, and the share spent on health care and housing has stayed roughly constant. That means more left over for luxuries. Homes have got bigger, and the number of cars per household has risen from 1 to 1.6."